The Secret of Wealthy Older Adults

How much do your grandparents (or parents) know about money? The answer might determine how much they have in their bank accounts.

That's the finding of Joosuk Sebastian Chae, a graduate student at the University of Massachusetts, who presented at the Gerontological Society of America's annual meeting in the District of Columbia in November. Using data from 1,596 older adults in the national Health and Retirement Study, he found that advanced financial literacy levels, which include familiarity with stock market investments and investment risk, are associated with higher levels of wealth accumulation. In fact, respondents with strong financial literacy had, on average, $71,187 more than those with weak financial literacy.

"Financial literacy is very important for older adults to keep their assets," Chae says. "I hope the findings motivate people to learn more [about money] and then keep their wealth." He adds that while younger generations often feel comfortable learning about concepts on their own through online research, older adults tend to be more isolated, and as a result, can be more easily scammed, or simply make choices that hurt them financially, like investing in a single stock or taking Social Security early.

Chae's study emphasizes advanced financial literacy over more basic concepts, like the ability to understand percentages. The questions he used to measure advanced financial literacy include: "Is it a big financial mistake to use a credit card without paying off the balance every month?" and "Which asset do you think historically has paid the highest returns over 20 years -- a savings accounts, bonds or stocks?". (The correct answers are "agree" or "strongly agree" and "stocks," respectively.)

Chae's work is in line with earlier findings by Annamaria Lusardi, a leader in the field of financial literacy and academic director of the Global Financial Literacy Excellence Center at the George Washington University School of Business. She and economist Olivia Mitchell of the Wharton School of Business at the University of Pennsylvania designed the financial literacy questions included in the Health and Retirement Study. Lusardi and Mitchell have repeatedly found a connection between financial literacy and wealth in their work, and Lusardi notes the particular importance of smart decision-making for older adults.

"When you make decisions at an older age, they are even more consequential. If you make a mistake at age 25, you might have time to correct it, but if you make a mistake at age 65 or 70, you don't have the benefit of time," she says. Older adults, she adds, are faced with many important money decisions, including when to take Social Security payments and how long to continue working. Despite that responsibility, she says her research has found that most older adults are not financially literate.

Debbie Banda, interim vice president of financial security at AARP, says that because of the shift away from defined benefit plans, like pensions, and into defined contribution plans, like 401(k)s, it's more important than ever for employees to understand how to make smart decisions about their money. "You need to be more tuned into it; it requires a more active participation in retirement planning than there was a few decades ago."

For older adults who want to improve their financial literacy, Chae suggests seeking out local programs related to money management. In some communities with colleges and universities, students volunteer to help older adults through workshops and other programs. Websites, including myretirementpaycheck.org from the nonprofit National Endowment for Financial Education and the government's mymoney.gov, are also helpful for DIY learning.

"It's never too late. Even if you're way behind the curve, anything you do now will help you," Banda says. While people often feel too overwhelmed to make any financial moves, she says even just small changes can have a big impact on your wealth levels. For example, making slight adjustments to spending so you can save more money, or delaying Social Security payments until age 70, can help contribute to your financial security. Free budgeting tools at aarp.org/money can help with that planning. "The biggest mistake you can make is not to plan at all," she says.

Lusardi adds that even though learning about money management early and getting a head start on saving and investing can have a bigger impact on later wealth levels, financial education at an older age can help older adults preserve the wealth they do have, avoid scams and identity theft, and make the best decisions for their situation. "Particularly at an older age, we are all very different and have different needs, different levels of risk aversion and different resources," she says.

Lusardi says workplace financial education programs are also a great way to help prepare older adults to make smarter money decisions before and during retirement. As she puts it, "If we have gyms at work, we should have financial wellness programs, as well."